Understanding Your Merchant Portfolio

August 19, 2021

A merchant portfolio has the residual rights owned by a payment processing company (a Processor), an ISO (independent sales organization), an independent agent, software companies, and point-of-sale companies. It comprises all the customers, commonly called merchants, that have been set up to accept card payments. In simple terms, the merchant portfolio is that company or agent’s book of business. It is their income stream. The main responsibility is to play point o sales and service.

What Makes a Merchant Portfolio Healthy?
The healthiest merchant portfolios are diverse, with a mix of industry types and businesses that utilize software to manage their day-to-day and run payments. They might include brick-and-mortar retail stores, restaurants, business-to-business companies, e-commerce/online stores, and vertical market focus. In a strong portfolio, there should also be a group of service businesses. This could include computer repair or home contractors along with healthcare professionals like doctors, massage therapists, or counselors. Diversity is truly important. Should an entire industry face challenges like the hospitality industry did during COVID, the merchant portfolio will still be able to survive.

Inactive vs. Active Accounts
A merchant portfolio can also contain both “active” and “inactive” accounts. What does this mean? An active merchant services account has consistent business transactions. An inactive account tends to have been either seasonal businesses or have periodic activity. Seasonal businesses accept transactions during certain times of the year. For example, a Christmas tree lot or a golf course might only be open seasonally. Periodic businesses have transactions on occasion. An example is an artist who may take payments upon completion of an order.

Merchant Residual Portfolio
The companies and/or individual that own the residual rights to each merchant account boarded, has a contractual agreement which pays according to sales and service terms and conditions. In terms of value, it will be assessed based on the collective 12-month average revenue of all accounts.

Merchant Portfolio Service and Management
Good service and management of each account increases a portfolio’s value. The attrition rate is a primary valuation statistic. A higher attrition rate equates to a lower portfolio value. There is a direct correlation between well-serviced accounts and low attrition rates. A Buyer will pay more to a Seller if there is historical data showing the acquisition investment will have a longer ROI (return on investment).

Valuation Methodology
Valuation is based on the historical performance and economic conditions for the period analyzed. If the general economy weakens, it is likely that sales volumes will decrease and/or merchant attrition (due to closures) will increase. Either of these consequences would have a negative impact on the valuation. Conversely, a strengthening of the economy would improve sales and reinforce businesses resulting in an improved outlook and value.

Portfolio Valuations
Valuations are a review of residual data that assess the portfolio’s fair market value. The residual data provides the ability to analyze numerous criteria and trends against industry averages and market conditions to best quantify portfolio values. When analyzing portfolios the Buyer does its best to objectively assess account traits and characteristics that indicate the health of the overall merchant portfolio. Once all criteria are consolidated and aggregated, they systematically review the data and apply a sales multiple on the portfolio’s most recent monthly revenue averages.

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